Retail investors warming to stocks as equity inflows turn positive

Retail investors appear to be finally shedding their fear of stocks, but perhaps they should be a bit more cautious.

Stock funds have experienced inflows throughout January so far, according to data provider Lipper. Barring a mass exodus out of stocks in January’s final week, the month will be the first in 22 months that stock funds have enjoyed a net flow of money coming in.

New research from Franklin Templeton Investments Corp. also supports the idea that retail investors are gradually warming up to stocks. In its report, “Thawing out from four-year freeze: Canadian investors express confidence,” the investment manager found that 14% of investors surveyed said they were “risk-takers,” up from the 8% level that has held steady in the past four years.

Canadian investors are becoming more confident and open to taking risks

“Canadian investors are becoming more confident and open to taking risks than at any time since Franklin Templeton started its investor personality research in 2009,” said the firm’s chief executive and president Don Reed.

Investors poured US$3.66-billion into U.S. stock mutual funds during the week ended Jan. 23. In the previous two weeks, they committed US$3.8-billion and US$7.5-billion, respectively.

Of course, those totals are still a long way from making up the more than US$150-billion investors pulled out of equity funds in 2012, and not even close to the nearly US$300-billion that stock funds have lost since 2009.

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But Colin Cieszynski, a senior market analyst at CMC Markets Canada, notes the flow back into equities marks an encouraging start to 2013.

“Overall, capital flows as we move into investing season (where deposits into retirement accounts create seasonal inflows of cash into markets) suggest that the sense of dread and fear that prevailed in recent years is dissipating and confidence about the global economy continues to improve, driving capital out of havens and back into risk markets,” he said.

Stéfane Marion, chief economist and strategist at National Bank, however, notes the increased bullishness by retail investors isn’t necessarily a positive indicator.

For one thing, there seems to be a difference of opinion between retail investors and institutional investors — something that is cause for concern, Mr. Marion said. For the week ended Jan. 23, ETFs, which are popular with institutional investors, had a net outflow of US$3.1-billion, while retail investor-friendly mutual funds enjoyed inflows.

Mr. Marion also pointed out that a recent American Association of Individual Investors (AAII) investor sentiment survey showed individual investors hit their most bullish level in two years last week.

The percentage of investors reporting they feel optimistic about the next six months stands at 52.3%, compared with the historical average of 39%. That optimism, suggests Mr. Marion, sets the stage for a correction period.

“From a contrarian standpoint, this development argues for a period of consolidation given that the S&P 500 is already up more than 5.3% this month,” he said.

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